IRS Lags on Approval of Advanced Pricing Agreements for Transfer Pricing

Multi-national corporations have a variety of options to price goods and services that are sold between the various countries in which they operate.  Each method has its pros and cons, but in addition to internal cost transfer considerations, these multi-national corporations also have to make the tax authorities in those countries happy, since the pricing mechanism chosen impacts the profit in each country and the subsequent taxes that country collects.

In the U.S., the IRS offers these companies an Advanced Pricing Agreement (APA) option so that the risk of a subsequent dispute is eliminated.  The problem is that the IRS is way behind on approving these APAs.

An article at CFO.com picks up on the challenges the IRS and companies face:

Senior finance and tax executives may well be wondering whether their companies should work with the Internal Revenue Service on transfer-pricing agreements after learning about the agency’s latest progress report. Last week the IRS revealed that it processed fewer Advance Pricing Agreements (APAs) last year, and the average time the IRS takes to process such deals rose to 40.7 months last year from the 37.2 months reported in 2010.

The article goes on to cite several causes, including a need to coordinate with other countries' tax authorities and the need to resolve complex cases that can provide guidance for simplier cases.

The issue of Transfer Pricing continues to be a hot button issue as tax authorities around the world take a hard look at tax revenue.

You can read the full article at: IRS Holding Up Transfer-Pricing Deals for Years.

Groupon Lawsuit Focuses on Improper Accounting and Weak Internal Controls

A news story from Reuters discusses a recent lawsuit filed against the daily deal company Groupon.  It lawsuit alleges improper accounting for customer refunds as well as an insufficient internal control structure.  An excerpt from the Reuters article:

According to a complaint filed in federal court in Groupon's hometown of Chicago, the company overstated revenue, issued materially false and misleading financial results, and concealed how its business was not growing as fast and was not nearly as resistant to competition as it had suggested.

I'll remind everyone that allegations in a lawsuit is not tantamount to fact, but it is a strong reminder that finance organizations should never lose site of the blocking and tackling  of accounting operations.  A strong internal control structure isn't just about preventive and detective controls, although those are certainly important.  It's also about the overall control environment and the "tone at the top"; that is, how senior management creates and supports the overall culture around the integrity of its financial statements.

Finance Transformation Gone Wrong - Inadequate Project Management

Note: This post is part of a series on the challenges of transformation and how to overcome them.

Inadequate project management.

Too many transformation initiatives either fail outright or don't achieve all of the goals due to poor project management.  One of the challenges I've seen in a number of organizations is that it's assumed a single person can be both intimately involved in the effort, perhaps as a subject matter specialist, and somehow manage the project "on the side". 

Even a relatively small transformation effort requires a full-time project manager.  Too often I've seen a person who is splitting their time between project manager and team member activities focus on the urgent needs of the project while unintentionally ignoring the important, but longer-term requirements of project management. The project manager must be able to step back from the urgent activities of the day to look at the longer term plan.  They need to see the forest for the trees, so to speak.

A second issue is that a person might be a good general manager in their organization but be a poor project manager.  There is some overlap in the skillset but there are also some key differences.  Most transformation efforts require a full-time project manager who's been down the road before.  The best project managers are the ones who can lead people and manage projects.  It's sometimes difficult to find those two roles in one person, but the project and the organization will be better for it if that type of person can be found.

The last point I should make is that while separate roles for Project Manager and Team Member is ideal, projects can still be successful if both roles are combined into one, which typically occurs on small projects.  When this does happen, however, it's critical that the Project Manager set some time aside each day to look at the longer-term implications of the project and to stay on top of the risks that can derail a transformation initiative.

Finance Transformation Gone Wrong - Inadequate Stakeholder Engagement

Note: This post is part of a series on the challenges of transformation and how to overcome them.

Inadequate Stakeholder Engagement

A good way to ensure that a transformation effort will fail is to exclude the stakeholders that will ultimately be impacted by the transformation.  It's rare that stakeholders are completely excluded. It's far more common for there to be token lip service to integrating stakeholders into the project.

An essential act for any engagement is to identify the major stakeholders that are impacted by the proposed change.  Remember that important stakeholders are not only those who have a formal title, but also those individuals who have significant influence on "public opinion" and who can derail a project if their concern are not considered.

The word to remember here is "RACI".  OK, so it's not really a word, but a way of remembering the role of the project stakeholders.  RACI stands for Responsible, Accountable, Consulted and Informed. At the start of a project, the project team should identify the individuals, by name and position, that fall into these four categories.  This will help the team draw the stakeholders into the engagement and ensure that their input is incorporated as the project progresses.

By identifying the significant stakeholders for a project and including them throughout the duration of the project, it's far more likely that the stakeholders will embrace the transformation rather than sabotaging it from the outside.

Finance Transformation Gone Wrong - Lack of Senior Level Support

Note: This post is part of a series on the challenges of transformation and how to overcome them.

Lack of Senior Level Support

Every project has a senior sponsor, at least in name.  But here's the rub - people aren't stupid.  They understand when a project has the backing and support of senior management and when someone's just there for window dressing. 

The Executive Sponsor plays an important role by setting the tone of the engagement and ensuring the project has the right skills and funding to be successful.  A common shortcoming in senior level support is the Sponsor who attends the kick-off, says a few words, and then disappears from sight.  Sure, they may show up at the steering committee meetings once a month, but the regular troops rarely see or hear from the sponsor again.  Real sponsorship is present in word and deed, and is highly visable to the people on the front line engaging in transformation.  What are some of the things an Executive Sponsor can do to ensure a successful transformation initiative?  Glad you asked.

1. Create a compelling vision and effectively communicate that vision.  People need to know where they're going and what value they will be creating.  A lack luster vision usually leads to lackluster results, as it's difficult to sharply focus energy and attention on a vaguely defined mission.
   
   
2. Create a guiding coalition.  Yeah, I got this from John Kotter at Harvard University, but he's a pretty smart guy.  An Executive Sponsor can't do it alone.  He or she needs a team of experienced and influential leaders who know how to get things done.
   
   
3. Pave the way with resources.  That could mean getting the budget to bring in the proper skills to a project or ensuring that a company's IT systems have what they need to be properly built, tested and deployed.
   
   
4. Overcome organizational resistance. In any project there will be those that benefit from the status quo.  The Executive Sponsor should be aware of resistance to the initiaitve and work to overcome it.

This list is by no means exhaustive, but strong project sponsorship can mean the difference between success of failure for transformation initiatives.

FASB, IASB to Work on Classification and Measurement of Financial Instruments

As part of the ongoing effort at reporting convergence between FASB and IASB, the Boards will look at the issue of financial instrument classification and measurement.  The Journal of Accountancy has a brief article on topic:  An excerpt is shown below:

FASB and the International Accounting Standards Board (IASB) are working together to reduce differences in their respective classification and measurement models for financial instruments.

The boards announced Friday that they will explore these models jointly, then decide whether to propose amendments to IFRS and U.S. GAAP.

These discussions will take place as part of FASB’s ongoing reconsideration of a Proposed Accounting Standards Update (ASU) on financial instruments. The Proposed ASU, Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities—Financial Instruments (Topic 825) and Derivatives and Hedging (Topic 815), was originally issued in May 2010. The IASB will take the discussions with FASB into consideration in its project to make limited changes to IFRS 9, Financial Instruments, which was issued in November 2009. The IASB’s project was amended in 2010 as a result of its ongoing work to develop a new IFRS on insurance contracts and feedback received on how IFRS 9 applies to particular instruments.

Here's the link to the article:  FASB, IASB to Work on Classification and Measurement of Financial Instruments.

Finance Transformation Gone Wrong - Inadequate Project Resources

Note: This post is part of a series on the challenges of transformation and how to overcome them.

Inadequate Project Resources

Even projects that are launched with a great deal of planning can fail if the staffing is inadequate.  Sometimes the inadequate part comes from the number of dedicated resources and sometimes it's the quality of the people assigned.  On a really bad engagement it can be both.  Companies that manage projects well understand that a transformation effort should be staffed by the company's best people, not their worst. 

One challenge that companies often have is that it's difficult and expensive to backfill positions.  The willingness of a company to backfill key positions is essential on most projects so that personnel assigned to the project don't also have to perform their "day job".  If backfilling doesn't happen, project staffing plans will have to maintain the fiction that these personnel will devote half a day to the project and half a day to their regular job - 12 hours each.  On major projects, the reality is that there will need to be a core group of individuals who are focused solely on the success of the project. 

In addition to an adequate level of staff who are focused on the project as their primary job, it's essential to choose individuals for both specific capabilities and their ability to lead initiatives.  Many of these project resources will have to use their influence to drive change in the organization, as they won't have direct managerial oversight of the many people required to successfully engage in transformation.  Individuals, particularly at the team lead level or higher, have to be comfortable pushing the envelope and engaging disparate stakeholders.  Companies that don't choose the best people because the departments "can't afford to let these people go" end up paying for it in the long-run (and ocassionally the short-run).  Do yourself a favor and pick the best people for the project and you'll likely be rewarded with an on-time and on-budget project that meets your intended goals.

Global Finance 360 focuses on the world of corporate finance and accounting and how these activities are impacted by globalization. As companies adjust to a changing world, Finance departments must also adapt to the changing environment as they seek to be value-added business partners. From Bangor, Maine to Bangalore, India, we examine the global changes impacting Finance and Accounting.

Friday Five: A Global Perspective | January 27, 2012

1. China-Briefing: Shenzhen and Beijing Raise Minimum Wages
   
   
2. India's Business Standard: IMF Cut World Growth Outlook as Eurozone Weighs
   
   
3. The Outsourcing Buzz Blog: Orchestrating Your Transition with Experienced Players
   
   
4. The China Digital Times: China: Slowing but Still Growing
   
   
5. Tico Times: Costa Rica Surpasses Foreign Investment Goals

Finance Transformation Gone Wrong - Unrealistic Project Timelines

Note: This post is part of a series on the challenges of transformation and how to overcome them.

Unrealistic Project Timelines

It's been said that when it comes to project management, you'll want it to be cheap, fast and right.  Unfortunately, you only get to choose two of those dimensions.  It's an unfortunate reality of life that timelines are often chosen for political considerations rather than basing the time frame on the objectives of the engagement, the defined scope and the number and quality of the resources assigned to the project. 

Project timelines should be built from the bottom up, with a detailed analysis of all the tasks that need to be completed, the key interdependencies between phases and tasks and the number of hours estimated to complete each task.  Extra time needs to be added for project management, vacation, and non-project related training.  Additionally, if something comes up during the project that pushes out the critical path, it's imperative that the project be reset, either through extending the timeline or by adding additional resources if that's feasible.

One of the fastest ways for a transformation project to go bad is to improperly prepare for the actual initiative.  Too many times a project is launched and no one wants to "waste time" with all that preparation stuff.  The reality is that preparation is key to a successful project.  And that includes everything from clarifying the objectives in the Project Charter to figuring out where people are going to sit and how they'll gain access to the virtual project team room.

Another challenge I see with tight project timelines is that key resources are often scheduled for multiple tasks that run concurrently.  This should be eliminated as part of the resource leveling exercise, but often these conflicts are dismissed with a "it'll all work out" mentality.  Project timelines are notoriously unrealistic when they double book resources and don't consider activities such as meeting and vacations.

Through proper preparation and realistic consideration of key activities, dependencies and resources, the project team can substantially reduce risk to the project by establishing a realistic project schedule.

Blogging for a Cause at Toolbox.com

I'm currently part of a blogging contest over at Toolbox.com.  My chosen charity is Habitat for Humanity International.  Please visit the Toolbox link and comment on, Tweet and Like my posts.  Every bit helps.  And when you do, you'll put me that much closer to a donation to Habitat.  Thanks.

Finance Transformation Gone Wrong - Vaguely Defined Project Scope

No one plans for a project to jump the track. They're all launched with the best of intentions. However, somewhere along the way something happens. Often, it's multiple "somethings". I once had someone land on my blog with the search term "Finance Transformation Gone Wrong". I had to laugh, as anyone who's been in the business of transformation has seen good projects turn bad for a variety of reasons.

For those engaged in the art of transformation, this series will discuss some ways a project can head south, along with the appropriate remediation strategies to increase the probability of project success. One of the first ways a project can run into trouble is through vaguely defined project scope.

Vaguely defined scope

There are times when a transformation effort goes wrong before the project even starts. If a transformation project is planned badly, it will be difficult to make up during the actual project. One of the chief culprits is scope. It's one of those things that sounds like it should be easy but in practical terms is difficult to define. The devil, as they say, is in the details. This is an area that should be thought through very carefully during the planning stage, agreed by the major stakeholders, and committed to in writing.

A key to keeping a sharp focus on scope is to keep the project's ambitions manageable. Picking a scope such as "let's revolutionize Finance" is bound to create problems since everyone has a different idea of what it means to revolutionize Finance. Heck, people can have different ideas of what it means to optimize the accounts payable invoice entry process. To boost project success, sharply define project scope and keep it in manageable chunks.

The second point is related. It isn't enough for the Project Manager or Executive Sponsor to have a sharply defined project scope. The important stakeholders who can support or derail a project must also agree on the project scope and its intended impact on the organization. And this is an area where silence definitely does not equal consent. There must be overt agreement of the scope of the transformation effort and its expected results.

A third point to keep in mind is to manage "scope creep". This can kill an otherwise solid project. Scope creep occurs when a project is expanded beyond the original scope as set out in the Statement of Work or other project documents. As the phrase "scope creep" implies, it often occurs in very subtle ways that may seem reasonable at the time but that, with time and volume, can weigh down a project and keep it from coming in on time and on budget. There should should be a very strict change control process in place so that when the inevitable scope issues come up, there is a defined process for managing scope changes. Any proposed change should be supported by a business case that provides a compelling business and/or economic reason for the proposed change. A business case doesn't have to be huge, but if there is a good reason for a scope change, it should be documented and approved according to the project's governance structure.

By creating manageable transformation initiatives, gaining agreement amongst critical stakeholders, and implementing a strong governance process for scope changes, a finance organization can begin the process of successful transformation.

Friday Five: A Global Perspective | November 18, 2011

1. China's Ex-pats: Emerging Asia Beckons.  Chris Devonshire-Ellis at china-briefing.com discusses changes in the Chinese employment system and its effect on foreign workers:

http://www.china-briefing.com/news/2011/11/18/chinas-ex-expats-emerging-asia-beckons.html

2. IASB and Japanese Regulators Work on Convergence. Inaudit.com covers the latest discussions.

http://inaudit.com/events/iasb-japan-regulators-working-on-ifrs-gaap-convergence-11166/

3. Accenture signs 5-year BPO contract for Accounts Payable outsourcing.  Accenture partners with Statoil, an international energy company with a presence in 40 countries.

http://www.offshoringtimes.com/Pages/2011/BPO_news3244.html

4.  IMF Sees "Buildup" of China Bank Risk Needing More Oversight

http://www.businessweek.com/news/2011-11-15/imf-sees-buildup-of-china-bank-risk-needing-more-oversight.html

5.  Shared Services Slash Costs.  Treasury & Risk Magazine disucsses a Hackett study that focuses on the move to multi-function shared services.

http://www.treasuryandrisk.com/2011/11/15/shared-services-slash-costs

Genpact Inaugurates Delivery Center in Dubai, UAE to Serve Middle East and North Africa-Based Clients

A press release from business process outsourcer Genpact announces the opening of a new delivery center in Dubai, UAE.  Here's an excerpt from the press release:

Genpact Limited (NYSE: G), a global leader in business process and technology management, today announced the opening of its Dubai, United Arab Emirates (UAE) global delivery center. The 80-seat modern center set up in Dubai as a licensed partner of Dubai Outsource Zone (DOZ) will provide business process services such as claims processing, customer service, collections, treasury operations, finance and accounting, analytics and risk-related services for clients in the Middle East and North Africa.

"We are delighted to begin operations in Dubai and hope to grow this center into a 500-person center in the next three years," said Tiger Tyagarajan, President and CEO, Genpact, speaking at the opening. "Not only will the center deliver business impact through our uniquely scientific Smart Enterprise Processes (SEP^SM) framework, it will also help our clients make smarter business decisions through our Smart Decision Services comprising analytics and research, reengineering and risk management."

Setting up operations closer to clients is part of Genpact's growth strategy and the decision to set up in the UAE is based on the excellent infrastructure, supportive government policies, connectivity with the rest of the world, and the ease of doing business in Dubai. Genpact now has delivery centers in 17 countries around the globe.

"The Dubai center will increase our capabilities to deliver services in Arabic and we will initially be focusing on clients in the UAE, Kuwait, Qatar, Bahrain, Oman and the Kingdom of Saudi Arabia markets," saidVishal Pandit, SVP and Business Leader, Middle East at Genpact. "We will be providing project-based analytics and reengineering services as well as transaction processing and customer care services."

Dubai Outsource Zone caters to organisations specialising in services such as business process outsourcing, knowledge process outsourcing and legal process outsourcing. Additionally, it offers an environment that attracts different elements of the value chain, including banking and finance, insurance, IT, legal and airlines.

Philippine Outsourcing Threatened by a Lack of Trained Workers

Despite the global slump, and perhaps because of it, the outsourcing industry is struggling to find enough trained workers to meet expected demand for outsourcing.  Mayala Business Insight has an article describing the problem.  Here's an excerpt:

THE outsourcing industry may be hard-pressed in adding 80,000 to 100,000 new jobs every year due to what is now described is the acute problem of declining trained manpower.

But despite this, the country’s information technology and business process outsourcing (IT-BPO) industry remains optimistic of hitting double-digit growth in revenues this year.

"80,000 is a stretch," said Trade Secretary Gregory Domingo at the sidelines of the 3rd International Outsourcing Summit (IOS) at Sofitel Manila yesterday.

Addressing the delegates earlier in his welcome remarks, Domingo said: "It is a supply-side problem, not a demand-side problem."

Coming from a wide base of 600,000 workers in the industry, adding 80,000 to 100,000 workers every year suited to the industry’s requirement is a challenge.

Here's the link to the full article: Outsourcing Threatened by a Lack of Trained Workers.

China remaining competitive despite a rise in labor rates

One of the questions around globalization is the issue of China's continued competitiveness in the face of rising labor rates as well as regional competitors.  The conventional wisdom is that China will lose its competitive edge due to increasing pressure on labor rates.

Turns out that hasn't come true, at least not yet.  A study recently released by the global bank RBS indicates that China continues to remain competitive.  Labor rates continue to rise, but other changes in China's economic environment are offsetting some of the cost pressures.

Here's an excerpt from a Wall Street Journal article:

RBS’s top China economist Li Cui writes in a research note published Wednesday that “evidence of China losing out is still absent.” Her view is that China has been remarkably adaptive to rising labor costs and a strengthening currency.

“One would have expected that labor intensive industries should have been hurt the most given their thin margins and relatively weak pricing power in the global market. However during this period China’s exports of light manufacturing products has risen to about one-third of the world markets (from 22% in 2005), dominating other regional competitors,” she writes.

Another website, The Edge (Malaysia), expands on the shift towards capital intensive exports which has the effect of reducing the impact of rising labor rates:

“But actual evidence of China losing competitiveness is still largely absent. In fact rising labour costs have gone hand-in-hand with China's rapid growth in global market share (from 7%% in 2005 to 11% in 2010).

“The rise in capital intensive exports has been a big part of the change. Machinery and transportation is now the largest category of exports, accounting for 53% of the total Chinese exports, up from 39% in 2001. In these sectors increases in labour costs have relatively minor effects,” said the report.

Due to the dynamic nature of globalization, no country can rest on its past accomplishments.  But given the ambition and talent of the Chinese people, it's unlikely that China will be out of the game any time soon.

Link to the Wall Street Journal article: China Isn't Losing Its Manufacturing Competitiveness After All

Link to The Edge (Malaysia) article: No Actual Evidence China Is Losing Its Competitiveness, Says RBS

Preparing for the Lean Finance Journey; Lean Finance Conference; Auckland, New Zealand, 17-18 October 2011

In conjunction with my planned workshops at the Lean Finance Conference in Auckland, New Zealand on the 17-18 October, 2011, I have published a new position paper in conjunction with BrightStar Conferences & Training titled Preparing for the Lean Finance Journey.

Here's an excerpt:

Every successful transformation initiative has its roots firmly grounded in a well conceived
and executed plan. As part of a lean finance initiative, finance leaders must make an
objective evaluation of their organization and its capacity to manage change if they are to
successfully launch and complete a transformation initiative. Here are four ways finance
leaders can guide their transformation efforts:

Continue reading Preparing for the Lean Finance Journey at the Conference website.

Surprise: Outsourcing Buyers Look at More than Price

A recent survey conducted by HfS Research shows that buyers of outsourcing services are looking for more than low cost when it comes to outsourcing relationships.  The survey asked purchasers of outsourcing services what they thought was important and compared their responses to what providers of outsourcing services thought buyers wanted from them.

It's no surprise that some metrics like pricing aligned pretty well between providers and buyers.  What is surprising is the degree of difference between the two groups when it came to the soft lever of transformation such as governance and change management.  The survey revealed that buyers placed a higher level of importance on these soft transformational levers. Shown below is a graph which summarizes the survey results:

Source: HfS Research

What is surprising is that outsourcing providers underestimate how much help clients would like in managing change in their organizations.  This is obviously an opportunity for those providers, but they'll need to make their capabilities clear so that buyers clearly understand the value these providers are rendering over the contract lifecycle.

You can read the entire post at The Undisputed Facts of Outsourcing Part 7: Service Culture is the New Differentiator.

Lean Finance conference in Auckland, New Zealand

I will be hosting a series of workshops at the inaugural Lean Finance conference in Auckland, New Zealand on 17 - 18 October, 2011.  Hosted by Conferencz and BrightStar Conferences & Training, the Master Class series I'll be facilitating covers four sessions:

1. The Value-Adding Finance Function
   
   
2. Lean Assessment of Your Organization
   
   
3. Re-engineering Finance Processes
   
   
4. Transforming the Finance Professional

You can read more about the Conference at Conferencz's Lean Finance website and register for the event.  I hope to see you there.

India Sees FDI Increase 43 Percent in April

A new article by Dezan Shira & Associates discusses a new report on Foreign Direct Investment (FDI) in India.  India is showing a sharp increase in April over the prior year for new investment.  An excerpt from the article:

Indian foreign direct investment in April grew at a rate of 43 percent year-on-year, up from US$2.17 billion in 2010 to US$3.12 billion this year.

The statistics show a global economic recovery, particularly in European regions. Mauritius, Singapore, the United States, United Kingdom, Netherlands, Japan, Germany and the United Arab Emirates were the major investors in India.

In particular, the highest investments for the month came from Singapore (US$1.17 billion), followed by Mauritius (US$976 million), Japan (US$235 million), France (US$220) and Cyprus (US$170 million).

India’s services sector was the leading sector in terms of FDI with the overall monthly statistics as follows:

• Services (US$658 million)
• Construction activities (US$311 million)
• Power (US$256 million)
• Computers and hardware (US$96 million)
• Telecommunications (US$46 million)
• Housing and real estate ($38 million)

 It's no surprise that services is the top category for FDI, but it's interesting that construction and power generation are also a focus.  This represents a prime area for FDI in India as the country works to upgrade its infrastructure.

Continue reading India Sees FDI Increase 43 Percent in April at India-Briefing.com.

 

Finance as a Catalyst for a Successful Merger or Acquisition - Program Management

Note: This is the second post in a multipost series.  You can read the Overview here.

As the Finance organization prepares for the effective integration of a merger or acquisition, there are several phases that must be planned.  These phases include:

• Pre-integration planning

• The "Day One" start date

• The continuing effort to merge the two organizations, including IT systems, work forces and governance models.

Any successful integration effort will be led by a strong Program Management Office (PMO) that provides the vision and guidance required.  The PMO is responsible for developing and executing the overall integration plan. The Finance organization can assist the PMO by identifying early on the leaders of the finance integration effort.  Team leads for each focus area within finance (e.g. general accounting, treasury, etc) should have not only relevant technical skills but also a proven track record of leadership.  The choice of individuals sends an important signal to the organization about its commitment to a successful integration.

Pre-Integration Planning

The time before the planned merger or acquisition date should be used to create a comprehensive plan that will guide the finance organization through and after the actual date of combination.  This will be a time when the finance organizations of both companies can exchange information that can assist in the integration planning.  There are a number of laws that govern the exchange of information in a merger or acquisition, the violation of which can lead to civil and criminal penalties.  In all instances the Finance organization should work very closely with their company's legal counsel to minimize the risk of gun jumping, or exchanging competitive information prior to the combination date.

As information is collected, a detailed plan should be developed that covers the activities of the Finance organization.  Subsequent posts will discuss some of these issues in detail, but in general the integration team should plan for the stub accounting period to account for the shortened reporting period (assuming the combination date isn't at the fiscal year-end).  Additionally, the integration team will need to think through critical issues such as notifying external and internal stakeholders of the planned changes (e.g. Where will suppliers send their invoices after the combination date?), how cash between the new and old legal entities will be separated, , how the two Finance organizations will work together, and how accounting information will be collected and aggregated given the disparate accounting systems.

Day 1 Activities

As of the date of the merger or acquisition, the integration team will need to properly value the acquired company or the acquired assets and liabilities.  It is essential that the acquiring company work closely with their external auditors to ensure proper valuation, including an audit of inventory that may be spread out over numerous locations.

The Day 1 activities also include the start-up of the combined operations, when the two companies are operating as one legal entity even though the key elements of the Finance organizations: the personnel and the IT and accounting systems are still separate.  This is where a well thought out plan is worth its weight in gold.  If the integration was properly planned, Day 1 will go well despite the complexities of the integration.

Continuing Merger Integration Efforts

Although the planning and Day 1 activities are essential to an integration, the way in which a company handles the post-merger activities will play a large part in how much and how quickly the anticipated synergies of the merger are realized.  There are different approaches to merger integration.  In some mergers or acquisitions, the acquiring company's business model and IT systems are the default standard and all of the target company's personnel and systems are converted over.  In other mergers, such as the HP-Compaq merger, the best of each company's systems are chosen while a new organizational model is developed.  If a company manages itself as a diversified conglomerate, it might even make sense to leave some or most of the systems "as is" since the acquired company will operate almost independently.  No matter which path is chosen, the efficient execution of the integration plan will in large part determine the success or failure of the merger or acquisition.

Conclusion

The above considerations just scratch the surface of the factors to be considered in a merger or acquisition.  No integration effort will go flawlessly, but if the integration effort includes detailed and realistic planning, an effective Day 1 start-up and effective long-term integration of both companies' work forces and systems, the finance and overall program management teams will greatly increase the odds of a successful integration.